Banks troubled with capital constraints sell their “excess baggage” of loan assets to other banks in the form of ‘Inter Bank Participation Certificate (IBPC). These IBPC transactions are aimed to fill the short-term requirements of banks and are typically bought back by the seller bank within three to four months, depending on the agreement.
Reserve Bank of India has permitted foreign banks and private sector banks to treat their investments in interbank participatory certificates (IBPC) to treat it as direct lending to the priority sector. A bank missing its target for priority sector lending target will be able to reach the target by buying IBPCs issued by fellow banks that have already exceeded in achieving their regulatory targets of priority sector advances and issued IBPCs for excess lending under various categories of priority sector.
There are two types of Inter-Bank Participation certificates (IBPCs); one on risk sharing basis and the other without risk sharing. Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk-sharing basis, are eligible for classification under respective categories of priority sector, provided the underlying assets are eligible to be categorized under the respective categories of priority sector and the banks fulfill the Reserve Bank of India guidelines on IBPCs.
In the case of IBPC without risk sharing, a bank missing the target can always buy an IBPC instrument issued by another bank at a price for a month or so. Later, the seller’s bank can buy back the portfolio. The IBPC on risk sharing can be issued for 91-180 days and only in respect of advances classified under standard Status where the conduct of account is satisfactory, the safety of advance is not in doubt, and all the terms and conditions are complied with. The aggregate amount of such IBPCs under any loan account at the time of issue is not to exceed 40 per cent of the outstanding in the account. RRBs can also issue Inter‐Bank Participation Certificates (IBPC) of a tenor of 180 days on a risk-sharing basis to scheduled commercial banks against their priority sector advances over 60% of their outstanding advances.
Note: Priority Sector Lending Certificates (PSLCs) are different from the Inter-bank participation certificates (IBPCs). The IBPCs are a form of securitization of loans through which a bank buys the assets of another bank for a stipulated period. In IBPCs, the buyer has to take on the credit risk of the loans, which is high in the case of the underserved priority sector. Further, the loans to be securitized have to be standardized, well-documented, and serviced. This may also be a problem in the case of loans to the needy and poor. On the other hand, the PSLCs separate the objective of transferring priority obligations from the credit risk transfer and refinancing aspects.
